India Union Budget 2012 FII Impact

Date: 26th March, 2012

General Anti Avoidance Rules (GAAR)  A transaction will be an „impermissible avoidance arrangement‟ (IAA) when the main purpose or one of the main purpose of Arrangement entered into is to obtain tax benefit  It has been entered into. accommodating party. elements that have offseting or cancel each other. Illustratively. location of a transaction or situs of an asset f) consider to look through an transaction g) re characterize equity to debt. in the misuse or abuse of the provisions of tax laws  Or lacks commercial substance. source. in whole or in part  Arrangement lacks commercial substance if:  Substance or effect of the arrangement is inconsistent with the form or differ significantly from the form  It involves round trip financing.. in a manner not normally employed for bona fide business purpose  Has created rights & obligations which would not normally be created between persons dealing at arm‟s length  Results. capital to revenue etc. or carried out. a) the tax office can disregard or combine any step b) ignore the arrangement c) disregard or combine any party d) reallocate expense and income e) relocate place of residence of a party. 2 . a transaction conducted through one or more person and disguises the value. location. ownership or control of fund which is the subject matter of the transaction  Involves location of asset or a transaction or place of residence of party without any substantial commercial purpose (other than tax treaty benefit)  Treaty override provided  Onus on tax payer to prove no tax avoidance Consequence : Once the arrangement is held as impermissible then the consequence of the arrangement in relation to the tax or benefit under a treaty can be different for each case. directly or indirectly.

 Term ‘through’ as mention above clarified to mean „ by means of‟. Grounds for defending against both indirect transfer & GAAR exists. or through or from any property in India. However. absolutely or conditionally. its value substantially from assets located in India  Clarified that „property’ includes & shall be deemed to have always included any rights in or in relation to an Indian company. directly or indirectly. or creating any interest in any asset in any manner whatsoever.Vodafone ruling overruled…  Law on „income taxable in India‟ retrospectively (since 1962) clarified as under :  all income accruing or arising. through or from any business connection in India. including rights of management or control or any other rights whatsoever Impact : In view of the above changes P-notes / Offshore Derivatives Instruments (ODI) structures may have to be re-evaluated for possible tax impact in India (read with the newly introduced GAAR provisions ) • • • P-notes / ODI may be viewed as indirect transfer of shares/ interest & hence may be subject to India tax.  Clarified that an „asset’ (share or interest in a company registered/incorporated outside India) shall be deemed to be situated in India if the share or interest derives. or through or from any asset or source of income in India. Indian tax assessors may interpret the new provisions to justify taxation on the same The industry is trying to lobby with Indian authorities but timing remains crucial 3 . or through the transfer of a capital asset situate in India. directly or indirectly. „in consequence of‟ or „by reason of‟  Term ‘transfer’ amended to include and shall be deemed to have always included disposing of or parting with an asset or any interest therein. voluntarily or involuntarily by way of an agreement (whether entered in India or outside India) or otherwise nothwithstanding such transfer of rights has been characterized as being effected or dependent upon or flowing from the transfer of a share of company incorporated outside India. whether directly or indirectly.

Conclusion  In consequence of GAAR coming into effect from 1st April 2012 most FII‟s based in Mauritius will need to reassess their strategy because of the following reasons:  Govt. However. it seems that there may still be the indirect transfer issue for the ODI/ P-notes. had been long trying to re-negotiate the treaty with Mauritius with no success  Some FII‟s may lack of commercial substance in Mauritius  Tax office can pierce the corporate veil & disregard the Mauritius entity as being a Special Purpose Vehicle only  Tax implications on Participatory Notes (P-Notes) / Offshore Derivative Instruments (ODI‟s) structure needs to be re-evaluated in view of retrospective clarificatory amendments to the terms “transfer”. Note : Nomura does not provide any tax advice to its clients and the clients needs to evaluate any impact / change in law with their own tax consultants. 4 . “asset” & “property” & introduction of GAAR  Singapore offers a better alternative to migrate FII business as highlighted in subsequent slide.

000 p.Why Singapore?  Treaty already has a limitation of benefit clause  SGD 200. the entire structure in Singapore as well needs to be evaluated thoroughly  Transition to Singapore still does not resolve the indirect transfer issue for ODI / P-notes and the same needs to be evaluated 5 . in operating expense for preceding 24 months  Strategic location and time zone (proximity to India)  Infrastructure (Office. sound & efficient legal system Note :  In view of GAAR & other amendments . traders)  Risk management / Senior management on ground  Financial centre for South East Asia  Competitiveness & Business Environment  Economic co-operation & trade agreement with India  Regulatory oversight by Monetary Authority of Singapore  Labor regulations most conducive  Transparent. employees.a.

Appendix .

Economic Times Article 24th March 2012 7 .

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